This is going to be a quick article, given how tough it is to find time while trying to absorb what I can from the fire hose of earnings this week. Until last week’s 1.8 percent increase, the MLP Index had closed down 7 weeks in a row. As Credit Suisse (CS) MLP Research Analyst Yves Siegel pointed out in his weekly report on the sector:
The Alerian MLP Total Return Index (AMZX) has never previously been down for seven straight weeks. However, the AMZX has been down for six consecutive weeks three times: 11/13/98 through 12/18/98, 5/7/99 through 6/11/99, and 9/5/08 through 10/10/08.
In the table below, I breakdown those 3 prior streaks and the most recent one, and how the Index has performed in the 4 weeks and 12 weeks following such streaks. Historically, MLPs have recovered from such corrections nicely, but I don’t see many catalysts for the index from here.
The most recent 7 week streak seems to have resulted from (in order): falling oil and natural gas prices, fears (unsubstantiated to this point) of interest rate increases, and a preference for other stocks.
If lower commodity prices were the main culprit of this recent drop, it’s unlikely MLPs will get any upside help from commodity prices this year. Natural gas production may slow in the second half of 2012, but given excess natural gas that currently sits in storage tanks around the country, prices aren’t likely to recover much. Oil is a tighter market, but given how low natural gas prices are, all production capex is currently focused on oil and liquids development. Oil production and already high oil inventory, coupled with the trend of lower oil consumption, has increased the downside risk of oil prices. A geopolitical flare up (or all-out war) that threatens global oil supply is probably the only factor that can meaningful increase oil prices in the near term.
MLP performance the remainder of the year will be varied, and stock selection will be more important than usual in driving investor performance. In years when there is a massive sector yield swing, MLP performance is usually much more uniform. In 2009, for example, the average yield on the MLP Index went from 12.1 percent at the beginning of the year to 7.4 percent at the end of the year, driving the Index to a total return of 76.9 percent in 2009. In 2009, it didn’t matter which MLPs you owned (as long as they all maintained their distributions), they almost all shot up. However, in 2011, when the index yield went from 6.20 percent to 6.09 percent, the index’s total return was just 13 percent, and varied wildly.
This year, we saw a spike in rates mid-March, but since then interest rates have settled back down. If this year ends with the 10-year U.S. treasury rate at around 2 percent, and if natural gas remains depressed, the catalysts for MLP performance will have to be company and situation specific. That means MLPs that are able to announce distribution increases will outperform. Record amounts of capital were raised in 2011, and this quarter the returns on that capital for MLP management teams will start to show up in distribution growth. That’s the catalyst for the next 8 months.
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